Metal Sector. The Rise of Electric Cars OVERWEIGHT. 10 July 2018

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1 Metal Sector The Rise of Electric Cars OVERWEIGHT 1 July 218 We initiate coverage on metal sector (nickel & gold) with OVERWEIGHT stance driven by rising nickel price and industry outperformance. We choose ANTM as our top pick with BUY recommendation and FY19 target price at 1,15 which implies 37.5% upside from current price. We are optimistic on ATNM due to robust operational performance ahead stemmed by higher production output and sales on all of their commodities while valuation remains very attractive. Meanwhile, we also initiate INCO with NEUTRAL rating as valuation has become demanding after recent rallies. Downside risk to our call are lower than expected nickel price and trade wars between US and China. Richard Suherman Equity Analyst ext. 61 richard.suherman@sinarmassekuritas.co.id Ticker Rating Current Price (IDR) Target Price (IDR) Upside (Downside) ANTM BUY 8 1, % INCO NEUTRAL 4,2 4,2 4.8% 1Q18 share performance in a glance. Despite JCI index declined by ~1% YTD, metal sector share performance remain robust with ~39.5% increase YTD, outperforming the index by almost 5%. Both ANTM and INCO stock price have rallied by ~28% and ~45% YTD respectively driven by robust industry outlook coupled with strong company operational performance in 1Q18. Not to mention, government relaxation on nickel ban has given positive sentiment to the sector. JCI index and metal sector share performance YTD 5.% 4.% 3.% 2.% 1.%.% 12/29/217 1/29/218 2/28/218 3/31/218 4/3/218 5/31/218 6/3/218-1.% -2.% JCI %YTD Metal %YTD Source: Bloomberg, Sinarmas Investment Research Nickel price surge drive sector outperformance. Nickel price has risen by more than 5% in the last 12 months and 15% YTD on the back off rising demand from China and tighter supply from Philippines. Data shows that nickel inventory has been steadily declining since 216 till now, reaching its lowest level in the last four years. We expect nickel deficit will continue to persist in the next few years as demand growth will remain robust while supply hardly catching up. As we remain bullish for nickel, we maintain our nickel price assumption at USD 14,5 per ton for FY18 and USD 15,5 per ton going forward.

2 Nickel Outlook The future gems. Despite recent selloff due to trade war sentiment between US and China, nickel price remains solid supported by growing demand of stainless steel and electric vehicles. Nickel s strength and non corrosive properties make it perfectly suited as the main ingredient for stainless steel making, used in broad range of industries including automotive, construction, and household appliances. On top of its noncorrosive properties, nickel is also an excellent electricity conductor which has higher energy density compared to other materials, well-suited for EV batteries. Price movements. After withstanding major correction since 211, nickel price is steadily moving toward an uptrend direction. Nickel price has gained by more than 55% in the last 12 months and 16% YTD to USD 14,76 per Mt on the back of rising demand and tighter supplies. Nickel has experienced a supply glut during Since then, demand has slowly outstripped production driven by rising Chinese import. China, the world s top nickel consumer, has doubled its ore import since 4Q17. Rising economy and industrial output backed by major infrastructure project (OBOR) have led to rising demand for stainless steel. Note that currently stainless steel represents two third of global nickel demand. China nickel imports 6, 5, 4, 3, 2, 1, - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg, Sinarmas Investment Research Supply glut. While demand seems to be on the rise, supply shows a sign of shortage led by continuous decline in nickel inventory over the last three years which pushes price upwards. Latest LME nickel inventory data in May 218 shows a huge decline by more than 21% YTD to 29,64 Mt, lowest level since 214. Major supply shortage was contributed from supply cut from Philippines after the president had ordered more than half of the country s top nickel ore supplier be shut or suspended to protect water resources. The decision has led to a significant decline in country s nickel production by 34% YoY in FY17 as several mining operations were shut down. Since then nickel price has been moving on upward trends while inventory plunges. 2 Metal Sector 1 July 218

3 LME inventory and price 5, 2, 45, 4, 35, 17,5 15, 3, 25, 2, 15, 12,5 1, 7,5 LME stock LME price Source: Bloomberg, Sinarmas Investment Research Taking the reins. We see Indonesia as the main beneficiary from a stricter environmental regulations in its biggest competitor, Philippines. Following a supply cut from Philippines, Indonesia has eased ban on nickel ore export, taking over export market to China from Philippines. Regulation on mineral ores export ban was initially launched in 214 as part of a national plan to boost economic growth by encouraging the development of domestic processing industry. However, since beginning of last year, the government has announced to begin opening up low grade nickel ore export for several players, especially those who have built smelter projects. As a SoE, ANTM is the main beneficiary on the export relaxation, with additional export quota up to four million tons this year. Going forward, we see growing nickel industry production from Indonesia, taking over Philippines role as the major exporter of nickel. China nickel import from Philippines and Indonesia Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Philippines Indonesia Source: Bloomberg, Sinarmas Investment Research 3 Metal Sector 1 July 218

4 Further upside on EV boom. Despite accounting for only a small percentage of nickel demand (~3%), we see battery usage in EV to be the main driver of growth for nickel consumption in the future. Electric cars currently account for about 1% of total global market share, which translates to demand for nickel about 7 thousand tons. An increase in EV penetration to 1% could bring nickel demand by more than five times. We see direct correlation between EV penetration and nickel demand growth. Not to mention, nowadays, nickel on average only makes up of one third of the battery component, but its concentration will keep on increasing in the future. While much of the EV batteries materials has revolved around lithium and cobalt, nickel is in fact the most important material to enhance battery performance as it offers higher density while reducing total raw material costs. Going forward, EV batteries are expected to lean heavily on nickel where it could make up to almost 8% of the battery components, as used by top companies like Tesla. Threat from Philippines and trade wars. We see supply recovery from Philippines and trade war tension between US and China as downside risks to nickel price movement. Last week, Philippines government has given back permission for 23 out of 27 Philippines mines that were previously suspended due to environmental regulation. Though potential additional supply from Philippines may slightly reduce nickel deficit, we expect government policy will remain unfavorable against nickel relaxation in the country. Moreover, we see demand growth for nickel to keep outpacing supply over the next few years, shown by the continuous decline in nickel inventory. Lastly, trade war tension between US and China may give negative sentiment on nickel price as imposing tariff between both countries in likely hurt both economies and industrial output, impacting demand for stainless steel and ultimately nickel demand. Hence, we expect momentary draw back on nickel price. Nonetheless, we remain optimistic on nickel price supported by rising demand from stainless steel and EV battery. 4 Metal Sector 1 July 218

5 Gold Outlook Remains flat. Gold price has rebounded slightly over the last few years on the back of rising tension between US and North Korea. Non-performing stock index and bond market as well as trade wars between China and US have also given positive sentiment to gold price. Despite that, we believe gold price will remain flat over the next few years. Rising US interest rates coupled with stronger US dollar currency will give downward pressure for gold price. Meanwhile, rising inflation due to commodity hike as well as continuous tension between US, China and North Korea will counter the pressure. Overall, we remain neutral on gold price with our price assumption at USD 1,3 per ounce. Gold price Gold price Source: Bloomberg, Sinarmas Investment Research 5 Metal Sector 1 July 218

6 PT Aneka Tambang Tbk. A Giant Leap BUY (TP: IDR 1,15) 1 July 218 We initiate coverage on PT Aneka Tambang Tbk (ANTM) with BUY recommendation and FY19 target price of IDR 1,15. Our TP represents a potential upside of 44%, derived via EV/EBITDA multiples. We are optimistic on ANTM due to bullish industry outlook on nickel as well as improving operational performance stemmed by higher production output and sales on all commodities divisions (nickel, gold and bauxite). At current price, we think the stock is still trading at an attractive valuation and still cheaper compared to its peers. Downside risk to our calls are lower than expected nickel and gold price as well as production output. Robust growth. Operational performance across all segments have been very robust this year. As of 1Q18, ferronickel production has grown by 17.5% YoY and 2.3% QoQ along with nickel ore output (+31.6% YoY, +2.6% QoQ). Meanwhile, gold sales have grown by a stunning 226.4% YoY driven by higher demand domestically and internationally. Going forward, we expect ferronickel production as the main driver of growth for the company considering East Halmahera ferronickel plant project will soon be completed, adding 5% to their current production capacity. We estimate a 6.52% CAGR production growth for ANTM s ferronickel output over the next five years. Meanwhile, gold production will remain flat concerning depletion of reserve. Nickel price boost margin. Given that nickel price has gained by more than 55% this year, we expect solid earnings and profitability this year. We estimate revenue from nickel segment to grow by 51.5% in FY18, derived from +2.2%/+23.9% increase in ASP and volume respectively. Additionally, margin will continue to expand whereby we estimate a 4% margin expansion in the operating income level (27.2% in FY18 vs 23.3% in FY17). Despite strong rebound in nickel price, we put a conservative stance on the margin expansion driven by rising oil price. Meanwhile, we expect a flat margin in the gold segment on the back of higher third party purchase contribution (lower margin) despite slight increase in gold price and USD/IDR. All in all, we see an increase in consolidated margin by 1.7% for FY18 (2.8% in FY18E vs 1.1% in FY17). Valuation remains attractive. ANTM is currently still trading at an attractive valuation of FY19F 1.1x PBV and 8.x EV/EBITDA, discounted from its historical average and its peers. We believe robust outlook on the nickel industry supported by stellar operational performance ahead will be the main driver for the stock performance. Richard Suherman Equity Analyst ext. 61 richard.suherman@sinarmassekuritas.co.id Stock Information Sector Bloomberg Ticker Metal ANTM IJ Market Cap. (IDR tn) 19.2 Share Out./Float (mn) 24,31/8,411 Current Price IDR 8 End-of-FY19 Target Price IDR 1,15 Upside (%) 43.8% Share Price Performance 52W High (6/6/18) 1,15 52W Low (12/7/17) 6 52W Beta 1. YTD Change (%) 28% Relative Valuations Trailing P/E 51.2x Forward P/E 23.4x P/BV 1.x EV/EBITDA 11.5x Highlights (IDR Bn) E 219F 22F Revenue 9,16 12,654 2,985 22,669 23,697 % growth -14% 39% 66% 8% 5% Gross Profit 852 1,644 2,791 3,339 3,881 Net Profit ,344 % growth -14% 111% 329% 4% 64% Gross Margin (%) 9% 13% 13% 15% 16% Net Margin (%) -14% 1% 1% 3% 4% Return on Equity (%) -8% % 1% 3% 4% Return on Assets (%) -5% % % 2% 3% EPS (IDR) (6)

7 Company Background Diversified portfolio. ANTM is a vertically integrated, export-oriented, diversified mining and metal company in Indonesia. ANTM undertakes all stages of the mining and processing process from upstream to downstream which include exploration, mining, smelting and refining until the marketing of the finished products. Their main commodities are nickel ore, ferronickel, gold, silver, bauxite, alumina, coal and other precious metals processing services. ANTM diversified portfolio with vertical integration process Nickel. ANTM s nickel business segment consists of producing and exporting nickel ore as well as producing, refining and marketing ferronickel. ANTM has two nickel mines located in Pomalaa, Southeast Sulawesi and Buli, North Maluku with total reserves amounting more than 33 million WMT, or 2% of national reserves. Additionally, ANTM is also equipped with one ferronickel plant which runs three processing smelters in Southeast Sulawesi with total capacity of 27, TNi. ANTM produces two type of nickel ores which are nickel saprolite, with higher Ni content of % and nickel limonite, with a lower Ni content of.8-1.5%. Nickel saprolite will be used for further making of ferronickel, while nickel limonite will mostly be exported due to government regulation of export ban on high grade nickel while allowing export on low grade nickel based on export quota given. Lastly, ANTM s ferronickel product contains about 8% iron and 2% nickel, sold mostly in the export market. Gold. ANTM s gold ore mining is produced from two mining sites located in Pongkor, West Java and Cibaliung, Banten whereby both are underground mining with total reserves of around 2.66 million DMT. Gold mined from both locations will be further refined in ANTM s processing and refinery plant located near Pongkor mine. ANTM s refinery plant has a total capacity of 7 tons of refined gold. Beside refining gold from their own mine, ANTM also purchases bullion from other countries to fulfill domestic demand while the remaining excess capacity will be used for refining services to third parties. ANTM s gold finished products include jewelry, minted bar, coins and etc are all being sold through their boutique. Starting in 217, ANTM has also partnered up with PT Pos Indonesia (Persero) as additional distribution channel to market their gold products. 7 Metal Sector - ANTM 1 July 218

8 ANTM s gold finished products Bauxite. Bauxite is commonly used as the raw material for the production of aluminium. ANTM produces bauxite from Tayan mine located in Kalimantan with a total reserve amounting to 46 million WMT, representing 13% of national reserves. To further process the mineral, ANTM has built two alumina projects which are Tayan chemical grade alumina plant and Mempawah smelter grade alumina refinery project. Currently, Tayan plant temporarily halt their operation to resolve an ongoing acquisition issue with its partner while Mempawah plant is still under construction. Going forward, bauxite will be one of the key drivers for ANTM s performance. ANTM s assets in operation Development projects. To further enhance company performance, ANTM is currently developing two main projects which involves building an additional ferronickel plant in East Halmahera, Sulawesi and a smelter grade alumina refinery (SGAR) plant in Mempawah, Kalimantan. The ferronickel plant construction progress is currently on schedule, with 55% completion up to March 218 and estimated to be commercialized by the end of this year or early next year. Meanwhile, SGAR project is currently on discussion with its JV parter, PT Inalum (persero) and estimated to begin operation in 221. East Halmahera ferronickel plant and SGAR plant have a total capacity of 13,5 TNi of ferronickel and 1 million tons of SGA respectively. 8 Metal Sector - ANTM 1 July 218

9 Operational Outlook Stellar year. Entering 218, ANTM has been ramping up production across all of their commodity businesses. In the nickel segment, production managed to grow by more than 3%/1% for both nickel ore and ferronickel respectively. Higher nickel demand from China coupled with government relaxation on nickel ore export have given strong momentum for ANTM to seize the opportunity by increasing their production output. Meanwhile for gold, despite recording a slight negative production growth by 9.3% YoY, gold sales still managed to record a stunning 226.4% YoY growth, driven mostly by third party purchase to cater high domestic demand. Based on management information, demand for gold in domestic market remains lucrative despite continuous weakening on USD/IDR. Moreover, ANTM has also undertaken several innovative strategies this year to boost gold sales such as selling Hello-Kitty shaped gold bars to Japan which prove to be very popular as well as partnering up with PT Pos Indonesia which greatly improves ANTM s distribution channel. Lastly, production for Bauxite has also been ramped up as the company has obtained renewal of export license for 84, WMT of bauxite this year. Going forward, bauxite production growth will remain high to support Ferronickel production and sales Nickel ore production and sales 25, 6,, 2, 5,, 15, 1, 5, 6,87 5,363 4,, 3,, 2,, 1,, 2,11,26 1,268, Q17 1Q Q17 1Q18 Production (Tni) Sales (TNi) Production (WMT) Sales (WMT) Gold production and sales 5, 4, 3, 223,286 2, 1, 17, Q17 1Q18 Bauxite production and sales 9, 8, 7, 6, 5, 4, 3, 2,3 2, 1, 83, Q17 1Q18 Production (Oz) Sales (Oz) Production (WMT) Sales (WMT) internal usage in their alumina refinery plants. 9 Metal Sector - ANTM 1 July 218

10 On target. Looking at a stellar 1Q18 production performance, ANTM is on track to meet its bullish target for FY18 where they are targeting ferronickel production at 26, TNi, or around 96.3% of their full annual capacity. Additionally, to support ferronickel production growth, ANTM is also targeting nickel ore production at around 8-9 million WMT where half of it (4 millions WMT) will be exported to other countries and the remaining will be used for ferronickel production. Note that around 8-95 tons of high grade nickel ore are required to produce one ton of ferronickel. Meanwhile, on the gold segment, ANTM is targeting 24 tons of gold sales, an 82% increase compared to last year. Latest news from the company has revealed that ANTM has managed to sell 12.8 tons of gold by May 218, more than half of its FY18 target in just 5 months. Hence, we are quite optimistic that ANTM will achieve its FY18 target guidance. What to expect in the future? Looking beyond 218, we are expecting a robust production output from ANTM. Gold output will probably be maintained at the current levels considering their current depleting reserve. Meanwhile, upside surprise will be on their nickel and bauxite division. Ferronickel production growth will remain robust in the next few years considering their refinery plant in East Halmahera will soon be completed. After completion, ANTM s ferronickel production capacity will be raised to 4, FNi per year, 48% increase from their previous capacity. Additionally, the ramping up production for the nickel ore will not be a problem as the company is able to easily ramp up extraction levels if necessary. Meanwhile, on the bauxite division, production will be ramped up once the Tayan CGA plant are fully operational and Mempawah SGA plant s construction is completed. Tayan CGA plant has the capacity to produce 3, tons of CGA which will consume around 8, tons of bauxite at full capacity. Moreover, Mempawah SGA plant will have an annual capacity of 1 million tons of SGA which will consume more than 2.5 million tons of bauxite. ANTM s ferronickel production and capacity forecast 45, 4, 35, 3, 25, 2, 15, 1, 5, F 219F 22F 221F 222F 223F 224F 225F 226F 227F Ferronickel Production Capacity 1 Metal Sector - ANTM 1 July 218

11 Financial Outlook Robust top-line growth. As of 1Q18, ANTM recorded its revenue at IDR 5.73 tn, increased by 247.2% YoY, supported by both ASP and volume increase across all business segments. Gold division remains as the top contributor (72.4% of ANTM s revenue) for ANTM with a stunning growth of 237.% YoY and 14.4% QoQ, stemmed by higher sales output (+226.4% YoY) and slight increase in ASP (+8.4% YoY). Additionally, nickel segment also booked a stellar growth of 294.9% YoY, derived from 19.3%/27.3% volume and ASP growth for ferronickel sales. Lastly, despite accounting for only a small percentage of ANTM s total revenue, bauxite sales revenue managed to grow by 54.8% YoY. We expect ANTM could book revenue at IDR 2.9 tn this year, an increase of 65.5% YoY. Looking beyond 218, we expect nickel segment to be the main driver of growth for ANTM, with an average growth of 8% over the next five years, while gold segment will remain flat, resulting in an average consolidated growth of 3% for ANTM. ANTM revenue breakdown and growth (in billion IDR) 14, 12, 1, 8, 6, 5,731 4, 2, 1, Q17 1Q18 Nickel Gold and Silver Bauxite and Coal ANTM revenue forecast and margin 25, 2.% 2, 15, 1, 5, 15.% 1.% 5.% F 219F 22F Nickel Gold and Silver Bauxite and Coal Net margin.% 11 Metal Sector - ANTM 1 July 218

12 Margin expansion. ANTM s margin has been steadily improving on the back of higher ASP and production output. While cash costs were relatively flat, nickel price has been improving in the last few quarters, resulting in a higher margin in the latest quarter performance. Meanwhile for the gold segment, despite slight increase in gold ASP, consolidated margin shows a slight decline due to higher third party purchase contribution. Note that third party purchase offers lower margin compared to own production. Going forward, ANTM s margin expansion will be driven by nickel segment s outperformance while we expect a flat margin from the gold division. Nickel and Gold segments NPM 4.% 33.2% 3.% 2.% 21.8% 22.8% 1.%.% 7.6% 6.8% 4.9% 2.5%.1% Q17 1Q18-1.% -2.% -17.% Nickel Gold and Silver -12.3% ICA consolidation may provide upside surprise. PT ICA is a joint venture company between ANTM (8%) and Showa Denko KK (2%), operating a chemical grade alumina (CGA) plant in Tayan. Currently, the company temporarily halts their production while awaiting the process of full stake acquisition from ANTM. Showa Denko has decided to bail out from the investment after the company had performed below their expectation, contributing continuous loss to ANTM in the last 3 years. Despite that, we believe the company s performance will soon be recovering supported by better efficiency as well as increasing price and domestic demand for aluminum. CGA, a refined product from bauxite, is a main component for the making of refractory, abrasive, glass, and LED screen. Note that currently Indonesia has been a net importer of aluminum over the past few years. The government has been striving to reduce aluminum import from abroad, hence government regulation will remain supportive for ANTM. Going forward, we expect gradual recovery from PT ICA once acquisition process has taken place and output capacity has been improved. 12 Metal Sector - ANTM 1 July 218

13 Valuation Attractive valuation. We have a BUY recommendation for ANTM with end of FY19 target price at IDR 1,15 derived from EV/EBITDA multiples at 1x (-1.25SD of 5 years average), which implies xx% upside potential from current price. ANTM is currently trading at a FY19F PBV of 1.1x and EV/ EBITDA of 8.x, which still provides an attractive valuation compared to its peers. Given strong nickel price momentum backed by robust production growth, we expect solid performance for ANTM in the upcoming years. Downside risks to our call include lower than expected nickel price and higher than expected loss from its associates and JV. ANTM trailing P/BV band PBV Average +/- 1SD +/- 2SD Source: Bloomberg, Sinarmas Investment Research 13 Metal Sector - ANTM 1 July 218

14 Income Statement (IDR Bn) E 219F 22F Revenue 9,16 12,654 2,985 22,669 23,697 Cost of Revenue 8,254 11,1 18,194 19,33 19,817 Gross Profit 852 1,644 2,791 3,339 3,881 General and Administrative ,54 1,12 Selling and Marketing EBIT ,537 1,955 2,433 EBITDA 638 1,412 2,649 3,35 3,948 Net Financing 24 (348) (355) (488) (445) Share in Net Loss of Associates & JV (282) (488) (41) (372) (196) Other Expense EBT ,95 1,792 Tax Non Controlling Interest Net Profit Balance Sheet (IDR Bn) E 219F 22F Cash & equivalents 7,623 5,551 3,434 4,75 4,237 Trade receivables 99 1,377 1,843 1,991 2,82 Other CA 2,16 2,74 2,775 2,969 3,84 Total current assets 1,63 9,2 8,52 9,36 9,42 PPE 12,959 14,93 16,85 17,62 17,51 Other LT Assets 6,392 6,919 5,929 5,483 5,134 Total Assets 29,982 3,14 3,65 31,58 32,37 Trade payables ,97 1,165 1,194 ST loans 3,275 4,119 3,518 3,859 6,11 Other CL Total Current Liabilities 4,352 5,552 5,484 5,963 8,298 LT loans 6,649 5,298 4,957 5,531 2,958 Other Total Liabilities 7,22 5,971 5,798 6,424 3,873 Share & APIC 6,338 6,338 6,338 6,338 6,338 Retained Earnings 9,661 9,766 1,59 1,469 11,141 NCI Other 2,41 2,387 2,387 2,387 2,387 Total Equity 18,49 18,49 18,783 19,194 19,866 Total Equity & Liabilities 29,982 3,14 3,65 31,58 32,37 14 Metal Sector - ANTM 1 July 218

15 Cash Flow (IDR Bn) E 219F 22F Net Income ,344 Depreciation ,51 1,29 1,456 Amortization Chg. in NWC 15 (9) (623) (22) (12) CF from Operating ,75 1,968 2,739 Capital Expenditure (1,252) (1,95) (3,43) (2,267) (1,896) Chg. in LT Assets 386 (585) Chg in LT Liabilities (27) CF from Investing (1,73) (2,387) (1,946) (1,829) (1,583) Chg. in Share & APIC Chg. in ST Loans (613) 339 2,251 Chg. in LT Loans (273) (1,352) (34) 573 (2,573) Dividends Paid 3 (32) (293) (411) (672) Others 24 (23) CF from Financing (178) (561) (1,246) 52 (994) Beginning Cash 8,87 7,623 5,551 3,434 4,75 Change in Cash (463) (2,73) (2,117) Ending Cash 7,623 5,551 3,434 4,75 4,237 Financial Ratio & Key Assumptions E 219F 22F Profitability ROE.4%.7% 3.1% 4.3% 6.8% ROA.2%.5% 1.9% 2.6% 4.2% EBITDA Margin 7.% 11.2% 12.6% 14.6% 16.7% Gross Margin 9.4% 13.% 13.3% 14.7% 16.4% Operating Margin.1% 4.7% 7.3% 8.6% 1.3% Net Profit Margin.7% 1.1% 2.8% 3.6% 5.7% Liquidity Current Ratio Solvency Debt to Equity Debt to Assets Valuation Price to Earning (PE) Price to Book (PBV) Key Assumptions Nickel Price ($/ton) 9,613 1,474 14,5 15,5 15,5 Gold Price ($/ounce) 1,247 1,26 1,3 1,3 1,3 Ferronickel Production (Tni) 2,293 21,762 25,679 28,761 31,637 Gold Sales (ounce) 328,86 424, , , , Metal Sector - ANTM 1 July 218

16 PT Vale Indonesia Tbk. Riding the Wave NEUTRAL (TP: IDR 4,2) 1 July 218 We initiate coverage on PT Vale Indonesia Tbk (INCO) with NEUTRAL recommendation and FY19 target price at IDR 4,2 derived via EV/EBITDA multiples at 1.9x (5 years average). Despite robust industrial outlook and better performance this year, we see recent rally in share price performance has led to fairly valuation for the company. Going forward, we see nickel price movement will be the main driver for INCO s top-line growth as production will remain relatively flat over the next few years. On the other hand, margin will keep on being pressured by rising coal and oil price. Ramp up post maintenance. Production during 1Q18 was recorded at 17,141 Mt, down by.5% YoY and 11.2% QoQ due to planned maintenance schedule in the first quarter. However, production should be ramped up in the following quarters as historically around 78% of total production occurred in the last three quarters of the year. INCO conservatively targets 77, tons of nickel matte production this year, a slight increase by.3% YoY. Going forward, we see a relatively stable production from the company considering their maximum annual capacity output at 81,5 tons per year. Nickel price surge offset rising coal and oil price. Nickel price has surged by more than 55% YoY and 15% YTD, resulting an increase in INCO s ASP during 1Q18 by 2.4% YoY and 9.% QoQ. Note that INCO s ASP has one-two months lag from LME benchmark price, hence it provides further upside on ASP in the following quarters. Though we see margin improvement driven by rising nickel price, pressure from coal and oil price remains a threat. Note that around 3% of INCO s total cost are used for fuel and energy expenses which directly correlates to coal and oil price movement. Overall, we estimate INCO could book a 5% net margin this year (vs 2.4% in FY17). Fairly valued. Though we see robust industry outlook as well as improvement on operational metrics driven by nickel price surge, we think the stock has been fairly valued given recent rally in share performance. INCO share has gained by more than 45% YTD which currently trades at 3.5x and 1.6x FY19F PE and PBV respectively, much premium to its historical average and its peers. Richard Suherman Equity Analyst ext. 61 richard.suherman@sinarmassekuritas.co.id Stock Information Sector Bloomberg Ticker Metal INCO IJ Market Cap. (IDR tn) 39,9 Share Out./Float (mn) 9,936/2,36.3 Current Price IDR 4,2 End-of-FY19 Target Price IDR 4,2 Upside (%) 4.5% Share Price Performance 52W High (6/6/18) 4,3 52W Low (7/11/17) 1,835 52W Beta 1.1 YTD Change (%) 39.1% Relative Valuations Trailing P/E x Forward P/E 3.5x P/BV 1.5x EV/EBITDA 21.4x Highlights (USD thousand) E 219F 22F Revenue 584, , , , ,49 % growth -26% 8% 34% 13% 1% Gross Profit 34,125 6,554 94, ,496 17,639 Net Profit 1,96 (15,271) 45,263 96,697 99,388 % growth -96% -91% -396% 114% 3% Gross Margin (%) 6% 1% 11% 18% 18% Net Margin (%) % -2% 5% 1% 1% Return on Equity (%) % -1% 2% 5% 5% Return on Assets (%) % -1% 2% 4% 4% EPS (USD). (.2).5.1.1

17 Company Background Pure nickel operation. INCO is one of the largest nickel mining company in Indonesia, operating integrated mining and processing facilities in Sulawesi. INCO produces nickel product in the form of matte which is an intermediate product used to manufacture refined nickel that has an average content of 78% nickel, 1% cobalt and 2% sulfur and other metals. INCO sold all of its nickel matte under long term contracts with its partners, Vale Canada Limited and Sumitomo Metal Mining with price capped at 78% discount from previous month average LME. Due to this strategy, despite sacrificing ASP, INCO could better maximize inventory turnover and eliminate marketing expense. INCO sales destination and ASP 1,2, 1,, 8, 6, 4, 2, 2, 18, 16, 14, 12, 1, 8, 6, Vale Canada Limited Sumitomo Metal Mining ASP LME nickel price 4, Under the umbrella of a global company. Currently, 58.73% of INCO s shares are hold by Vale Canada Ltd, a wholly owned subsidiary of the Brazilian mining company, Vale S.A. Vale group is one of the world s largest mining company, whose presence and operations have reached global market. The company currently the largest producer of iron ore and nickel in the world. Being s under the market leader which possesses high expertise in nickel mining operation will directly benefit INCO as the subsidiary of a global mining company. ANTM s Shareholders 2.49%.69% 2.9% 58.73% Vale Canada Ltd. Sumitomo Metal Mining Public Others 17 Metal Sector - INCO 1 July 218

18 Integrated operation. INCO currently holds one of the largest mining operation in Indonesia with a total concession area of 118,17 hectares (4.2% are still greenfield) and total reserve amounting to 95.1 Mt. Its main operation is currently located in Sorowako, South Sulawesi where it mines nickel ores from the ground and refine them to nickel matte. INCO also operates its own hydro power plant to cater internal electricity usage which enables the company to reduce cost of operation. INCO operation process 18 Metal Sector - INCO 1 July 218

19 Operational Outlook Ramp up post maintenance. As of 1Q18, INCO produces 17,141 Mt of nickel matte, down by.5% YoY and 11.2% QoQ due to planned maintenance schedule in 1Q18. However, production will be ramped up in the remaining quarters where we expect quarterly output of 2, Mt to catch up with this year production target at 77, Mt. Historically, around 78% of total production occurred in the last three quarters of the year due to routine maintenance which took place in the first quarter. On another note, currently INCO has a total annual capacity of 81,5 Mt. INCO nickel matte production 9, 75, 6, 45, 3, 15, 17,224 17, Q17 1Q18 Nickel Matte Potential upside from limonite ore. There are two types of nickel laterite in our soil, namely limonite ore and saprolite ore. Saprolite ore is located directly beneath limonite ore and it contains fewer iron (Fe) material and higher content of nickel (Ni) which are generally more valuable than limonite ore. However, limonite ore itself has a value and it is potentially usable in the making of battery for EV. Currently, INCO only extracts saprolite ore while discarding the limonite ore. The company is not utilizing the potential value of the ore despite no additional cost involved. The management is currently in discussion to make use of the limonite ore, though the detailed plan is not yet clear. Not to mention ore export are heavily regulated by the government. Nickel ore deposits 19 Metal Sector - INCO 1 July 218

20 Financial Outlook Nickel price as the growth driver. As volume will remain relatively stable over the next few years, top-line growth will be mainly driven by ASP on the back of nickel price. As of 1Q18, INCO has booked a revenue of USD 17.5 mn, an increase by 18.4% YoY derived from +2.4% increase in ASP. However, note that INCO s ASP has a 1-2 months lagging effect from LME nickel price benchmark, hence there is further upside from ASP increase. Additionally, we estimate INCO s ASP for FY18 could reach to USD 1,875 per ton (+34.2% YoY) which should translate to a revenue of USD 842. mn (+33.8% YoY). INCO revenue and ASP 8, 15, 6, 12,5 4, 1, 2, 143,945 17,455 7, Q17 1Q18 Revenue ASP LME nickel price 5, Rising oil and coal price pressurize margin. Both coal and oil price have increased by 15.5% and 22.5% YTD respectively on the back off rising demand and tighter supply. Accordingly, rising energy price put heavy pressure on INCO s operating margin as around 3% of their COGS are used for fuel and energy expenses, which have direct correlation with coal and oil price. We estimate a 2% increase in COGS due to rising energy cost which should translate to 11.2% (vs 1.% in FY17) in gross margin and 5.4% (vs 2.4% in FY17) in net margin this year. INCO margin (FY14-FY18F) 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% -5.% F Gross margin Operating margin Net margin 2 Metal Sector - INCO 1 July 218

21 Valuation Fairly valued. Given that INCO s share price has risen by 45.3% YTD, we think the stock is fairly valued at the current level. INCO is currently trading at 3.5x and 1.6x FY19 PE and PBV, much premium to its historical average. Despite rising nickel price, we think margin will remain under pressure from rising coal and oil price. Meanwhile, volume sales will potentially remain flat over the next few years. Taking everything into consideration, we take NEUTRAL stance on INCO with FY19 target price at IDR 4,2 as valuation has become quite demanding. Our target price is derived from EV/EBITDA multiples using its 5 years average at 1.9x. INCO trailing P/BV band PBV Average +/- 1SD +/- 2 SD Source: Bloomberg, Sinarmas Investment Research INCO trailing EV/EBITDA band EV/EBITDA Average +/- 1SD +/- 2SD Source: Bloomberg, Sinarmas Investment Research 21 Metal Sector - INCO 1 July 218

22 Income Statement (USD thousand) E 219F 22F Revenue 584, , , , ,49 Cost of Revenue 55,18 622,78 747,53 78,785 79,852 Gross Profit 34,125 6,554 94, ,496 17,639 Operating Expense 12,131 11,339 12,664 13,947 14,93 Other Income/Expense (7,696) (1,43) (13,514) (14,41) (14,563) EBIT 14,298 (15,215) 68, , ,982 EBITDA 157, ,16 227,173 31,947 39,18 Net Financing (9,133) (7,85) (3,63) EBT 5,165 (23,2) 64, , ,982 Tax 3,259 (7,749) 19,398 41,442 42,595 Net Profit 1,96 (15,271) 45,263 96,697 99,388 Balance Sheet (USD thousand) E 219F 22F Cash & equivalents 185,56 221,699 32, , ,183 Trade receivables 146, , ,542 27,623 21,738 Other CA 266,978 29,78 219,94 294, ,679 Total current assets 599, ,56 76, , ,6 PPE 1,532,653 1,493,789 1,455,484 1,395,81 1,342,523 Other LT Assets 93,685 93,714 85, , ,642 Total Assets 2,225,492 2,184,559 2,247,573 2,3,83 2,355,766 Trade payables 64,274 6,94 77,84 81,36 82,354 ST loans 36,462 36,743 36, Other CL 31,253 31,617 4,435 46,31 46,736 Total Current Liabilities 131, ,3 154,57 127, ,89 LT loans 73,95 36, Other 185, , ,5 282, ,635 Total Liabilities 39,93 365,192 45,575 49, ,725 Share & APIC 414, , , , ,173 Retained Earnings 1,42,416 1,45,194 1,427,825 1,476,174 1,525,868 Total Equity 1,834,589 1,819,367 1,841,998 1,89,347 1,94,41 Total Equity & Liabilities 2,225,492 2,184,559 2,247,573 2,3,83 2,355, Metal Sector - INCO 1 July 218

23 Cash Flow (USD thousand) E 219F 22F Net Income 1,96 (15,271) 45,263 96,697 99,388 Depreciation 121, , ,75 135, ,542 Chg. in NWC (3,21) 35,267 (3,46) (89,6) (3,116) CF from Operating 28,767 93, , , ,143 Capital Expenditure (5,813) (86,633) (94,4) (75,777) (85,255) Chg. in LT Assets (2,726) (29) 8,491 (69,53) (3,915) Chg in LT Liabilities (11,28) 13,778 51,48 31,395 4,236 CF from Investing (97,853) (64,567) (72,884) (34,52) (113,886) Chg. in Share & APIC Chg. in ST Loans (448) (36,295) - Chg. in LT Loans (36,763) (36,8) (36,295) - - Dividends Paid (1,274) 49 (22,631) (48,349) (49,694) CF from Financing (37,794) (36,47) (59,374) (84,644) (49,694) Beginning Cash 194, ,56 221,699 32, ,998 Change in Cash (9,194) 36,139 8,686 (55,386) 1,185 Ending Cash 185,56 221,699 32, , ,183 Financial Ratio & Key Assumptions E 219F 22F Profitability ROE.1% -.8% 2.5% 5.1% 5.1% ROA.1% -.7% 2.% 4.2% 4.2% EBITDA Margin 27.% 21.2% 27.% 31.9% 32.2% Gross Margin 5.8% 1.% 11.2% 17.6% 17.7% Operating Margin 2.4% -2.4% 8.1% 14.6% 14.8% Net Profit Margin.3% -2.4% 5.4% 1.2% 1.3% Liquidity Current Ratio Solvency Debt to Equity Debt to Assets..... Valuation Price to Earning (PE) 1, Price to Book (PBV) Key Assumptions Nickel Price ($/ton) 9,613 1,474 14,5 15,5 15,5 Nickel matte production (ton) 77,581 76,87 77,37 77,577 78,74 23 Metal Sector - INCO 1 July 218

24 SINARMAS SEKURITAS INVESTMENT RATINGS GUIDE BUY: Share price may rise by more than 15% over the next 12 months. ADD: Share price may range between 1% to 15% over the next 12 months. NEUTRAL: Share price may range between 1% to +1% over the next 12 months. REDUCE: Share price may range between 1% to 15% over the next 12 months. SELL: Share price may fall by more than 15% over the next 12 months. DISCLAIMER This report has been prepared by PT Sinarmas Sekuritas, an affiliate of Sinarmas Group. This material is: (i) created based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such; (ii) for your private information, and we are not soliciting any action based upon it; (iii) not to be construed as an offer to sell or a solicitation of an offer to buy any security. Opinions expressed are current opinions as of original publication date appearing on this material and the information, including the opinions contained herein, is subjected to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst (s) responsible for the preparation of this publication may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, integrating and interpreting market information. Research will initiate, update and cease coverage solely at the discretion of Sinarmas Research department. If and as applicable, Sinarmas Sekuritas investment banking relationships, investment banking and non-investment banking compensation and securities ownership, if any, are specified in disclaimers and related disclosures in this report. In addition, other members of Sinarmas Group may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from companies under our research coverage. Further, the Sinarmas Group, and/or its officers, directors and employees, including persons, without limitation, involved in the preparation or issuance of this material may, to the extent permitted by law and/ or regulation, have long or short positions in, and buy or sell, the securities (including ownership by Sinarmas Group), or derivatives (including options) thereof, of companies under our coverage, or related securities or derivatives. In addition, the Sinarmas Group, including Sinarmas Sekuritas, may act as market maker and principal, willing to buy and sell certain of the securities of companies under our coverage. Further, the Sinarmas Group may buy and sell certain of the securities of companies under our coverage, as agent for its clients. Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Recipients should not regard this report as substitute for exercise of their own judgment. Past performance is not necessarily a guide to future performance. The value of any investments may go down as well as up and you may not get back the full amount invested. Sinarmas Sekuritas specifically prohibits the redistribution of this material in whole or in part without the written permission of Sinarmas Sekuritas and Sinarmas Sekuritas accepts no liability whatsoever for the actions of third parties in this respect. If publication has been distributed by electronic transmission, such as , then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Additional information is available upon request. Images may depict objects or elements which are protected by third party copyright, trademarks and other intellectual properties. Sinarmas Sekuritas(218). All rights reserved.